The share of private sector banks (PVBs) in certificate of deposit (CD) issuances declined from 85 per cent in January 2022 to 30 per cent in December 2024 even as the share of public sector banks (PSBs) concomitantly increased from 6 per cent to 69 per cent during the period, according to an assessment by RBI officials.
This contrasts with the general belief that issuance of CDs is dominated by PVBs to complement their current and savings account (CASA) deposits, officials Anshul, Priyanka Priyadarshini and Dipak R Chaudhari said in an article ‘Drivers of CD Issuances: An Empirical Assessment’, published in RBI’s latest monthly bulletin.
“It has been observed that during the Covid-induced liquidity surplus phase, private banks were front runners in issuing the CDs; however, after February 2022, PSBs dominate the share in CD issuance.
“Foreign banks and relatively new Small Finance Banks (SFBs) have limited presence in the CD market. CD rates are relatively higher for SFBs while PSBs were able to raise CDs at relatively lower rates,” the officials said.
Solvency support
CDs, which are money market instruments, are issued by banks to meet their short-term funding requirements. They act as an alternate source of short-term funding to complement other traditional funding sources for commercial banks, giving them liquidity and solvency support.
As CDs have fixed tenor, banks can better manage their cash flows and plan for future banking activities. They are issued by banks for up to one year, while the non-bank financial institutions can issue CDs for a duration of one to three years.
Outstanding CD issuances increased to an all-time high of ₹11.75 lakh crore during FY25. In the recent period, these instruments were in focus, with higher issuances, as deposit growth lagged credit growth.
The officials noted that although CD market is largely a bilaterally negotiated market, CD issuances is found to be sensitive to current and expected rate of interest. Furthermore, during uncertainty, banks tend to reduce CD issuances.
“Amongst the various tenors, the share of CDs issued up to 91 days and between 180-365 days dominate the CD issuance, thus making CDs either an instrument of short-term liquidity management or an instrument to lock short-term rates for longer period (up to 1 year), which may be beneficial for banks during the interest rate upcycle,” they said.
Short-term needs
This is further corroborated by the fact that the share of CDs between 180-365 days has declined since April 2023 when RBI paused interest rate hikes. Since then, the share of CDs issued up to 91 days dominate the CDs issuance, indicating the use of CDs as instrument to meet short-term liquidity needs.
The average tenor for PVBs is higher at 222 days, vis-à-vis both PSBs as well as Small Finance Banks (SFBs) at 155 and 215 days, respectively.
The officials observed that longer tenor of CDs issuance by PVBs imply that they raise funds to not just meet the short-term funding requirements but also for locking in lower interest rates. PSBs have an average tenor of 155 days, indicating use of CDs mostly as instruments for their short-term funding needs.
They noted that mutual funds remain the dominant investors, with an average share of 85 per cent since November 2021. Among other investors, PVBs and PSBs have an average share of 11 and 6 per cent, respectively, while corporates have a marginal share